sources of finance - adv and disadv

Question 1

owners personal finance adv

Answer 1

This allows the owner to keep control of the business.

It can reduce the amount to be borrowed from other sources.

Question 2

owners personal finance disadv

Answer 2

It can be difficult to withdraw savings once they are invested in the business.

There is a risk that the owner could lose their savings if the business fails.

Question 3

retained profits adv

Answer 3

This can be used to make larger purchases, such as assets or for bulk buying.

The business doesn’t go into debt

Question 4

retained profits disadv

Answer 4

A business can find it more difficult to grow if it regularly uses retained profits, especially to solve short-term cash-flow problems.

Question 5

sale of assets adv

Answer 5

Money can be raised from the sale of an asset to boost cash flow.

The money does not need to be repaid.

Question 6

sale of assets disadv

Answer 6

If the finance is required urgently, the business may have to sell the asset for less than it is worth.

Question 7

sell and lease back adv

Answer 7

The use of the asset is retained, which might be essential to the business, e.g. selling and leasing back the main shop/factory/office.

The business passes over responsibility for maintaining and renewing equipment to the leasing company.

Question 8

sell and lease back disadv

Answer 8

Leasing over a long period of time can be expensive – ultimately, the business may pay back more than it received from the sale.

Question 9

share issue adv

Answer 9

Very large sums of money can be raised through the sale of shares.

The money does not need to be repaid.

Question 10

share issue disadv

Answer 10

Dividends have to be paid to shareholders.

It can be expensive to advertise and organise the sale of shares.

Question 11

debentures adv

Answer 11

Control of the business is retained.

These can be paid back over a long time.

Question 12

debentures disadv

Answer 12

Interest must be paid annually, even if a loss is made, unlike with shares where dividends are only paid out if profits are made.

Question 13

bank overdraft adv

Answer 13

This is usually easy for a business to arrange with its bank.

It allows a business to continue to pay business expenses, despite there being no money in its bank account.

Question 14

bank overdraft disadv

Answer 14

High interest rates are usually applied by the bank for borrowing money in this way.

The overdraft can be withdrawn by the bank at any time and must then be repaid.

Question 15

trade credit adv

Answer 15

This allows a business to sell goods at a higher price and earn a profit before the bill needs to be paid.

It helps a business to keep going when cash flow is poor.

Question 16

trade credit disadv

Answer 16

Discount for prompt payment is lost.

Suppliers will be reluctant to continue to offer credit if a business does not pay within the agreed credit period.

Question 17

debt factoring adv

Answer 17

Responsibility for collecting the debt is passed on to the factor, saving the company time and effort.

Cash flow is improved by receiving an advanced payment of the debts from the factor.

Question 18

debt factoring disadv

Answer 18

The business has to sell the customer debt for a reduced amount, i.e. it receives less money than is actually owed

Factoring companies are usually only interested in large amounts of debt.

Question 19

grants adv

Answer 19

These are often offered as an incentive and a way of helping a business get started or expand.

The money does not need to be repaid.

Question 20

grants disadv

Answer 20

They can be complicated to apply for and can require the business to meet certain requirements.

Grants are usually one-off payments that are not repeated.

Question 21

bank loan adv

Answer 21

The business can budget for the repayments.

Purchases of essential equipment can be made in advance and paid back over a number of years.

Question 22

bank loan disadv

Answer 22

Interest has to be repaid along with the loan amount.

Small businesses may find it more difficult to secure a loan and often need to pay higher interest rates, as they are a greater risk.

Question 23

hire purchase adv

Answer 23

Expensive equipment can be bought with only an initial deposit.

The asset, e.g. a delivery van, is owned by the business at the end of the repayment period.

Question 24

hire purchase disadv

Answer 24

The business does not own the asset until the last instalment is paid.

It can be an expensive form of borrowing if interest rates are high.

Question 25

mortgage adv

Answer 25

It can be paid back over a long period of time, e.g. 25 years.

The interest rate charged is often lower than the rate on a bank loan.

Question 26

mortgage disadv

Answer 26

Interest has to be repaid along with the loan amount.

The mortgage provider owns the property until the last repayment is made. This means the business could lose the property if it does not keep up the repayments.

Question 27

venture capitalists adv

Answer 27

Large amounts of investment can be gained.

Venture capitalists are willing to take on more risky investments than banks.

Question 28

venture capitalists disadv

Answer 28

Venture capitalists have an equity stake, which means control and a share of profits are given up.

Question 29

crowd funding adv

Answer 29

Finance can be raised from individuals when banks see a venture as too risky.

Some funds are donated, so there is nothing to repay.

Question 30

crowd funding disadv

Answer 30

There is a low success rate. Only a small percentage of crowd-funded ventures get off the ground, often because they have not reached their target amount.

Privacy can be a problem as ideas become public and can therefore be copied.